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Bearish Sentiment is Spreading

Since mid March the AAII bullish sentiment reading has been below its long term bullish average. As a contrarian indicator, low levels of bullish investor sentiment typically point to equity markets that are near their bottom. Keeping in mind though, this sentiment reading is most predicative at its extremes. Earlier this week, the AAII bullish reading declined 4 percentage points to 28.1% and the bearishness reading jumped 11 percentage points to 39.9. The bullishness level is now more than one standard deviation below its long run average.

In addition to a low level of bullishness for individual investors, the recent release of the NAAIM Exposure Index declined to 16.39%, down from 21.34% in the prior week. The NAAIM Exposure Index represents the average exposure to US Equity markets reported by NAAIM members.NAAIM member firms who are active money managers are asked each week to provide a number which represents their overall equity exposure at the market close on a specific day of the week, currently Wednesdays. Responses are tallied and averaged to provide the average long (or short) position or all NAAIM managers, as a group. As noted in the below chart, low NAAIM Exposure Index levels have generally coincided with equity market turning points.

These various sentiment measures seem to be coming together at the same time to indicate a bearish view of the markets. Since these types of sentiment readings are contrarian ones, possibly the market is nearing a turning point with stronger returns through the fourth quarter. As we have noted numerous times in prior posts, sentiment measures alone must be evaluated in the context of other market and economic fundamentals.